Centre gears to tackle runaway inflation, fiscal deficit and economic slowdown

In a move to soften the blow of the recent increase in diesel prices and tempering the persistent rise in food prices, the Union government has decided to release 10 million tonnes of foodgrains through the Food Corporation of India in the open market.

According to government data, food prices hit a high of 12.03 per cent in August.

A senior official of the Finance Ministry told The Hindu that this was part of Finance Minister P. Chidambaram’s multi-pronged plan to simultaneously tackle the runaway inflation, an unmanageable fiscal deficit and an economic slowdown, leading to diminished public and private investment despite the growth in demand.

Every month, 2.5 million tonnes of grain will be allocated through auction for the next four months. “We expect food prices to start dropping significantly as a result of this, since we are releasing the foodgrains on a no profit, no loss basis,” the official said.

“In a worst case scenario, the cost of collection and storage of the grain will only be marginally higher than the auction price, but this will be more than offset by the reduction in … inflation. The… spinoff of reduced inflation will be lower interest rates, leading to increased investment,” he noted.

The government data says the annual Consumer Price Inflation (CPI) was 10.03 per cent in August, driven mainly by a rise in food prices. The country’s retail inflation is reportedly the highest among the BRICS nations and above the RBI’s “comfort level.” The Wholesale Price Index also rose to 7.55 per cent in August on the back of rising food prices.

The Ministry’s multi-pronged approach to interlinked issues, which will be implemented in the next few months, underscores its fears that the economy could be hurtling to a point of implosion.

Sources in the Ministry point to the slowdown in public and private investments because of interest rate volatility in an environment of growing demand, which is widening the demand-supply gap. Between 2010-11 and 2011-12, consumption grew by 14 per cent in rural areas and 12 per cent in urban areas, while manufacturing grew by 0-0.1 per cent.

The inability to cap the fiscal deficit by cutting planned public investment either in infrastructure or in welfare schemes like those under the Mahatma Gandhi Rural Employment Guarantee Act has left the government with very little elbow room, they say.

“Only way out”

According to the Ministry, cutting subsidies, as in the case of the recent increase in diesel prices, is the only way out of the present vicious economic cycle to a virtuous one. “As much as 40 per cent of diesel is consumed by industry, including for running mobile towers and power generators in five star hotels and shopping malls, 22 per cent is consumed for transport, while 17 per cent is used by farmers. The government still bears a subsidy of Rs.9 a litre of diesel even after hiking the retail price by Rs. 5. It is… unsustainable for the government to continue subsidising industry in this manner,” the official said.

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